Many investors dream of becoming stock market millionaires to retire early and live off the passive income generated by their portfolios. For instance, an average 4% dividend yield across a diversified mix of dividend shares would produce a healthy £40,000 in cash payouts each year from a £1m portfolio.
But, could this goal be achieved with a more modest sum? How about nearly a third of that glorious £1m mark? That’s a challenging conundrum. An investor with a very spartan lifestyle might make it work, but most have some expensive commitments or want a few more luxuries than beans on toast every night.
So, let’s look at what a £333,000 portfolio could realistically generate in passive income.
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Extra cash, but don’t quit work yet
The passive income a stock market portfolio can produce hinges on its average dividend yield. This can frequently change. Companies often cut, cancel, or suspend dividend payments due to challenging circumstances or evolving priorities. A recent example was the Covid-19 pandemic, when many businesses halted shareholder payouts.
Relying on the income produced by a £333,000 portfolio alone leaves little leeway. This raises the risks for investors who think it’s a sufficiently large nest egg to leave their jobs and sail off into the sunset.
For instance, the average dividend yield for FTSE 100 shares is currently 3.52%. If our theoretical investor’s portfolio matched that, they’d earn £11,721.60 in annual shareholder distributions. That’s a tidy sum, but it’s well below the National Minimum Wage for a full-time worker.
That said, investing in some of the highest-yielding UK shares could boost an investor’s passive income earnings. At a punchier 8% average yield, a £333,000 portfolio could produce £26,640 in annual dividends. Now, that’s more like it!
However, investors lured by the appeal of high-yield shares risk falling into dividend traps. Some market-leading payouts are unsustainable, particularly when they’re funded by debt or a business has cash flow difficulties.
For extra comfort, I’d want to spend a bit longer on the treadmill and fatten my portfolio with a decent buffer. Fortunately, at a third of a million pounds, compound returns really start to kick in. By reinvesting dividends into more stocks, investors can accelerate the process further.
A high-yield stock to consider
For those unsatisfied with the FTSE 100 average, the index offers several attractive high-yield candidates. One worth considering is Land Securities Group (LSE:LAND). It sports a juicy 7.3% yield.
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This Real Estate Investment Trust (REIT) offers investors exposure to commercial property spanning offices, retail, and leisure spaces. It’s made a remarkable recovery from the pandemic as office working makes a comeback. Impressively, occupancy for its central London portfolio hit 97.9% in its first-half results.
Despite this, the group’s keen to pivot to growth opportunities in residential property and shopping centre acquisitions. It’s aiming for a 20% uptick in earnings per share from 50p to 60p by 2030. Landsec’s purchase of a 92% stake in Britain’s largest open-air shopping complex, Liverpool ONE, is a testament to these efforts.
Forecast dividend cover of just 1.2 times earnings is below the two-times safety threshold for reliable passive income. If the company encountered financial difficulties, a dividend reduction could be on the horizon. Nevertheless, Landsec’s near-term future looks bright for now.
